What are capital and equity

Equity

The share of the capital that belongs to the owners of a company and that is not financed by loans or other financial transactions. They are funds that are made available to a company by its owners (property) for an indefinite period of time. The equity (net worth) arises arithmetically as the difference between total assets and total debts. While sole proprietorships and partnerships keep a variable equity account (profit and loss are assigned directly to the equity account), corporations have a nominally fixed (constant) capital account, which is referred to as share capital in the GmbH and as share capital in the stock corporation. In addition to the paid-in capital in an AG (stock corporation), capital in a GmbH (limited liability company), the open and hidden reserves as well as any profit carried forward are included in the equity capital. The opposite is borrowed capital. Equity consists of financial resources that are made available to the company by its owners without any time limit. Equity can be added to a company from outside (capital increase through contributions) or from inside (waiver of profit distribution, so-called profit retention).

calculation
In the case of a corporation, the equity is calculated from the subscribed capital plus the capital reserves, the retained earnings, the special item with a reserve portion minus the outstanding contributions to the subscribed capital.

The term effective equity also includes hidden reserves. A distinction is also made between variable equity and constant equity depending on the variability.
The counterpart to equity is borrowed capital. The two together result in the balance sheet total. Equity is the difference between assets and liabilities shown in the balance sheet.



Funds or materials belonging to the owner (s). Mathematically, equity results from the difference between assets and debts. For sole proprietorships and partnerships, the amount of equity is derived from the sum of the shareholders' capital account balances. In the case of corporations, the total equity is calculated from the nominal capital plus the open reserves and the profit carried forward.

Equity can be added to a company in two ways:
1. Through equity financing: In the case of partnerships, either the shareholders' capital contributions are increased or a new shareholder is added. Corporations issue new shares that are either taken over by the previous owners or by new owners. In the case of stock corporations, one speaks of a capital increase.
2. Through self-financing: This means the retention of profits, which leads to an increase in equity. The prerequisite for this is that the owner waives any profit distribution, because the company's equity is only available in return for some form of profit sharing. The equity has the following meaning:

For the banks as providers of debt capital, the equity capital has the function of securing the borrowed capital. The amount of equity capital is one of the essential components for a company's creditworthiness, which is also expressed in the requirement to comply with certain vertical financing rules. The greater the sum of equity, the greater the credit leeway of a company.

The importance of liquidity is that the equity capital of partnerships is very variable; In the case of a stock corporation, the equity is permanently available due to the fungibility of the shares. Contrast borrowed capital.

In contrast to borrowed capital, equity is its own funds that are generally made available to the company on a long-term basis by the owners from outside through equity financing or internally through self-financing. The equity is basically the residual amount if the debts are deducted from the assets.

In sole proprietorships and partnerships, the equity changes practically continuously due to the withdrawals with which the equity accounts of the entrepreneurs are debited, as well as through the annual profit shares and, if necessary, through the deposits that are credited to the equity accounts of the entrepreneurs. The company's equity results from the sum of the respective stocks of the entrepreneurs' equity accounts.

In corporations, equity is made up of several items. According to the balance sheet structure of Section 266 (3) HGB, the following items of equity must be shown on the liabilities side of the balance sheet:

I. Drawn capital;
II. Capital reserve;
III. Retained earnings:
1. legal reserve;
2. Reserve for own shares;
3. statutory reserves;
4. other retained earnings;
IV. Profit carried forward / loss carried forward;
V. Annual surplus / annual deficit.

This equity, which may have to be reduced by the outstanding contributions and the own shares, is also referred to as equity capital because it has been determined on the basis of the balance sheet. The effective equity that would be obtained if one added the hidden reserves to the equity capital on the balance sheet can only be estimated. Equity, especially subscribed capital, is often incorrectly referred to as "liability capital" or "guarantee capital". The equity or nominal capital is not liable to the creditors, but the company's assets are the basis of liability.

The funds made available to a company by its owners without any time limit. Equity is added to the company from outside (e.g. so-called ordinary capital increase against contributions) or from within (e.g. waiver of profit distributions, capital increase from company funds). The equity of a stock corporation includes: Share capital. /. Outstanding contributions to the share capital + open reserves + parts of the special item with a reserve portion + retained earnings. /. Balance sheet loss = balance sheet equity + hidden reserves = effective equity

The financial resources raised by the owners of a company to finance it. Equity also includes the financial resources that remain in the company from the profit generated and are not distributed to the owners. Equity and debt together make up the company's total capital.

Equity represents the financial resources usually made available to a company by its owner or its shareholders on a long-term basis. It documents the owners' claim to the company's assets and at the same time serves as a liability basis and thus also to secure outside capital. The share capital or the share capital is shown in the balance sheet as subscribed capital and thus identifies the capital to which the liability of the shareholders for the liabilities of the corporation is limited (Section 272 (1) HGB).

In the case of constant capital accounts, retained profits (accumulation) are not allocated to subscribed capital, but to retained earnings or profit carried forward. Taking into account the special items with a reserve portion, the equity capital of a corporation shown in the balance sheet results from the subscribed capital, the capital reserve, the revenue reserves, the equity portion of the special items with a reserve portion, the annual surplus / or Annual deficit for the financial year as well as any profit or loss carried forward. If the hidden reserves are added to the equity reported in the balance sheet, the effective equity is obtained.

In contrast to borrowed capital, these are funds that were raised by the company owners to finance the company or that were then left in the company as a profit.

See also under self-financing, guaranteed capital, nominal equity.

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